When is a Liquidator Not a Liquidator?

By Stephen Briscoe

Inducements

Together with the changes mentioned in our previous post, the proposals will also “beef-up” the existing prohibition on inducements being offered in relation to the appointment of provisional liquidators, liquidators and receivers. These amendments are to be welcomed, but in truth there is little evidence that the existing provisions do not already contain sufficient powers to deal with any such inducements. In fact, there is no indication that it has ever been necessary to invoke the existing provisions.

What Is The Definition Of A Liquidator

One issue that has come to the fore in recent years relates to the definition of who is a liquidator. In practice, this has come into question as a result of two cases where provisional liquidators were appointed pursuant to s.193, and where for a variety of reasons they realised significant assets before the winding-up order was made, and where the compulsory liquidations were then converted to creditors’ voluntary liquidations pursuant to s.209A .  In simple terms, the argument was whether a provisional liquidator appointed under s.193 of the Ordinance automatically became its liquidator on the making of the winding-up order.

The need for clarification arose  because if he remained the provisional liquidator, and the liquidation was subsequently converted into a creditors’ voluntary liquidation, there was a strong argument that the Ad Val fee, payable as a percentage of realisations, was not payable on the realisations made by the provisional liquidator.

This fee is seen by many as effectively a “tax” on creditors insofar as the effect of the payment of the fee, (see here for the rate at which Ad Val is charged), is to reduce the amount available to creditors. Historically, the purpose behind the fee was to help to fund the operations of the Official Receivers Office, but in recent years these fees are no longer ring-fenced but are paid straight into the general coffers of the Administration. As a result of a recent decision in the Court of Appeal (See Here) it appears that any lingering doubt as to the definition of a liquidator has been resolved. (If you don’t have time to read the judgement, the answer is that a provisional liquidator does become the liquidator on the making of the winding-up order and so the Ad Val is payable on the provisional liquidators’ realisations even if there is a conversion. Nonetheless, the Administration’s proposals will undoubtedly be useful in simplifying the legislation and avoiding any future difficulties.

Unfortunately, at the same time that the proposals close down one problem area, they potentially open up a different one. This relates to the appointment of provisional liquidators pursuant to s.194 (1A) –  (otherwise known as Panel T appointments). At the moment, a provisional liquidator appointed by the Official Receiver pursuant to the above provisions has limited powers to deal with the assets of the Company. In practice it is necessary for him to wait for his appointment as liquidator – usually pursuant to a summary procedure order – before he can proceed to dispose of the assets. The Administration’s proposals would mean that a provisional liquidator appointed pursuant to the above provisions would, in effect, immediately have the powers of a liquidator. Accordingly, it will be necessary for the Administration to craft very carefully the appropriate provisions to limit the powers of the s.194(1A) provisional liquidator until such time as he has formally been appointed as liquidator.

Committee Of Inspection

At present, before a liquidator can appoint solicitors to act for him in a court winding-up it is necessary for him to get the sanction of the court or the Committee of Inspection (CoI). The Administration proposes to remove this requirement, although it remains likely, and for good reasons, that the liquidator will still need to obtain sanction if he wishes to actually commence legal proceedings. However, in the spirit of giving with one hand and taking away with the other, there will be express provisions in the draft legislation meaning that liquidators will be required to give seven days notice to the CoI  of their intention to appoint a solicitor.

However, on a more positive note, it will in future be easier for solicitors employed by liquidators to have their fees agreed on a more timely basis than is the case at present – we’ll deal with this issue in our next post.

Liquidators Not Safe From Legal Action – Even After Their Release

Finally, under the heading of controlling the actions of liquidators, the Administration proposes bringing in provisions whereby even though a liquidator may have been released by an order of the court, action could still be taken against him under the provisions of s.276 of the Ordinance which deals with misfeasance and breach of fiduciary duty.

This proposal has raised considerable concerns amongst members of the insolvency practitioner fraternity, although the Administration has sought to play down the potential effects of these provisions by pointing out that action can only be taken against a liquidator with the consent of the court. It is to be hoped that these provisions are very carefully worded so as to ensure that the possibility of frivolous and unmeritorious actions coming to court is limited. The nature of the work undertaken by insolvency practitioners, almost by definition, means that one or other party is not happy with the outcome. Hong Kong is a notoriously litigious society and even if allegations have no merit there is every likelihood that insolvency practitioners will have to incur significant costs, if only in defending the initial application to the court. Moreover, if they have already obtained their release as liquidator, the default position is that there will be no assets in the estate to defray those costs.

In the next post we’ll move on to some “nuts and bolts” issues regarding the operation of committees of inspection, electronic communication with stakeholders and some long overdue upgrades to the rules dealing with unfair preferences.